BOJ will remain a dovish outlier, keep rates low as its yen dilemma worsens

  • BOJ expected to maintain short- and long-term rate targets
  • Decision expected June 17, 02:30-05:00 GMT
  • Yen weakness becomes a new headache for the BOJ
  • Governor Kuroda is expected to brief the media at 06:30 GMT

TOKYO, June 13 (Reuters) – The Bank of Japan is expected to keep interest rates extremely low on Friday, unfazed by a relentless fall in the yen which is pushing up import costs and showing few signs of slowdown as other central banks around the world withdraw monetary stimulus.

The yen’s weakness, once welcomed for the boost it gives the export-dependent economy, has become a source of concern for Japanese policymakers as it inflates already rising import costs and inflicts household difficulties.

The deepening dilemma for the central bank was evident last week when BOJ Governor Haruhiko Kuroda faced a firestorm of criticism on social media for saying households were increasingly accepting loans. higher prices.

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He was forced to retract that comment and on Monday returned to his long-held view that a weak yen was good for the economy. Read more

Despite grumbling about yen weakness, however, the BOJ is likely to keep interest rates ultra-low, believing a rate hike now would do more harm than good in cooling a fragile economy, three sources said. familiar with central banking thinking.

“The BOJ does not target exchange rates to guide monetary policy,” one of the sources said.

“What’s important now is to support the economy with an ultra-loose policy,” the source said. This view was echoed by the other two sources.

At a two-day meeting ending Friday, the BOJ is expected to keep its short-term rate target of -0.1% and its 0% ceiling for 10-year government bond yields unchanged.

The BOJ is caught in a new conundrum. While core consumer inflation exceeded its 2% target in April for the first time in seven years, the rise was mainly due to fuel and food costs.

Fearing that such cost-driven inflation could hurt consumption, the BOJ has repeatedly stressed its determination to keep monetary policy extremely loose until wage growth picks up.

But the BOJ’s dovish stance dragged down the yen, which weakened to 135.22 to the dollar on Monday, the lowest since 1998. That is hurting households by pushing up their cost of living.

While the BOJ could raise rates as a last resort if the yen soars in freefall, analysts doubt such a move could reverse a broad and strong trend in the dollar driven by the Reserve’s aggressive rate hike plans. US Federal.

“It’s clear that the BOJ has no intention of changing ultra-accommodative monetary policy anytime soon,” said Naomi Muguruma, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“But the environment surrounding the BOJ is changing rapidly,” she said. “If the yen slips below 140 or 145 to the dollar, the BOJ could be forced to raise its yield target.”

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Reporting by Leika Kihara; Editing by Edmund Klamann

Our standards: The Thomson Reuters Trust Principles.

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